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The Dynamics of Firms' Credit Ratings


  • Bijapur, M.


This paper analyzes the dynamics of firms' credit ratings, in the context of a multi-period moral hazard problem, in which borrowers have incentives to repudiate their debt obligations. Borrowers with short credit histories face the poorest incentives, and (depending on initial conditions) for these borrowers debt repayment can only be enforced by the threat of liquidation. However, over time if borrowers repay debt on all dates, they will establish a good credit history. This may improve their incentives, such that they will repay debt because they are concerned about their reputations for being a good credit risk, even if they face no threat of liquidation if they do default. The model generates predictions which explain two stylized observations on the dynamics of firms' credit ratings.

Suggested Citation

  • Bijapur, M., 2000. "The Dynamics of Firms' Credit Ratings," Discussion Papers 0019, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0019

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    References listed on IDEAS

    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    3. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
    4. Ted Temzelides & Bernandino Adao, 1995. "Beliefs, Competition, and Bank Runs," Finance 9511001, EconWPA.
    5. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
    7. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
    8. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
    9. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
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    More about this item



    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G19 - Financial Economics - - General Financial Markets - - - Other


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